An overflowing, standing-room-only crowd filled the room on the top floor of the Reuters building in Manhattan last night to hear a panel discussion on energy risk management. More specifically, the topic du jour focused on electricity generation and trading. Art Altman of the Electric Power Research Institute (EPRI) presided over a panel of experts, including Alexander Eydeland (Morgan Stanley), Steven Oster (PSE&G) and Glen Swindle (Credit Suisse).
Chris Donohue, Managing Director at GARP, kicked off the evening with a presentation about GARP’s newest certification, the Energy Risk Professional (ERP) program (learn more about that here). A number of ERP Holders representing the first class of the certification were in attendance as well, and were recognized with a genial round of applause. Congratulations to them for their spirited effort at tackling a tough exam!
(By the way, Alexander Eydeland should be a familiar name to those who have taken the ERP or are pouring over the ERP Course Pack now: chapters from his co-authored book, Energy and Power Risk Management are in the study guide).
GARP hosted last night’s event, as part of an international series of forums on the future of energy risk management. The crowd, approaching 250, listened intently to the panelists’ views on a number of topics, ranging from the complexity of hedging energy to utilization of VaR to smart grid hang-ups, and more. Panelists mused on a few thoughts before turning to the crowd for questions.
Here are some of the highlights:
* Altman led off by asking what makes trading and risk management of electricity and related fuels (gas, coal, etc) so much more challenging than financial risk management of bonds, stocks, currencies, etc? Or, at least what are the salient differences? (Note: this is a dandy of a question, one I hope to take on in future blog posts, stay tuned). Swindle took the lead, bluntly stating that electricity is more volatile. He says power and commodities are “special all the time,” meaning there are a lot of risks with few hedging strategies. In short, he’s “haunted” by the number of risk variables with such few mitigation techniques. How does one handle a commodity that has hundreds of forward curves?
Oster echoed Swindle’s sentiments, then added that electricity is not storable, which is problematic. Also, constraints on physical infrastructure and delivery methods make dealing with electricity unique. Eydeland too shook his head, thinking of the number of variables involved in managing a beast like electricity. Theories and models that work with traditional financial trading instruments just don’t work in energy, he says. On paper, everything looks fine, but engineering and environmental aspects (i.e., the physical world of energy) can change at a given moment, thus adding a measure of complexity to the fundamental issues at hand. On top of all this, the illiquid nature of energies is problematic for risk managers.
* Altman: what are your biggest headaches these days? Eydeland pointed to regulatory uncertainty. Regulations, he said, could change overnight. They are impossible to hedge and forecast. Credit problems are an issue right now too. Money’s not moving fast enough to the right places at the moment, causing headaches in the energy field. Oster’s headache revolves around valuation. How does one value a 30-year old power plant, for instance? Traditional VaR methods don’t work in this instance. Further, he applauded the efforts of the ERP program, because in the energy risk management world, there are no common metrics or models being applied across the board. In short, energy risk managers often aren’t “speaking the same language,” and this needs to be fixed.
At this point, the microphones in the audience came to life. Here are a few highlights:
* One audience member was curious as to how the panelists were dealing with the smart grid factor. Oster noted that once smart grids are used effectively, the dynamics of power usage would certainly be altered. Swindle, however, is holding back on the smart grid factor for now because he is unsure of the rapidity with which the idea will develop. As of now, there are no analytics with which to conjecture. He agreed with Oster though: once up and running, smart grids could refine and smooth the operating market. Altman deftly handled the smart grid line of questioning, noting that in a flip of the status quo, power companies could turn to consumers to purchase energy to fulfill peak demand requirements. In so doing, the risk mitigation technique of turning to consumers could alter hedging strategies. Smart grids will also dramatically decrease peaks in pricing markets. (Clearly smart grids are Altman’s bag. Check him out in the November and December issues of Energy Risk too).
* On taking into consideration the financial health of suppliers in the energy chain, Eydeland says one must worry about this factor “a lot.” And it’s not just credit worthiness—cash flow management has become a concern for risk managers. How funds are allocated within a company (smartly, to the right projects, etc), is something to keep an eye on.
* How does one hedge in electricity knowing that weather is volatile? Put it in the contract! So says Eydeland anyway. But Eydeland and Oster spun the audience member’s question, lamenting on the inability to hedge against economic growth—or lack thereof. Oster, for one, noted that load growth predictions did not live up to their expectations, which can be traced to the economic downturn. This is a real risk management concern.
* How does one choose the kind of power generation to purchase? Choices like picking gas generation over renewable generation are not always easy to make. Well, Oster says, generation and purchase of it varies from state to state. So that’s one problem to deal with. Secondly, the bidding process for power is extremely dynamic. Bids, for example, can go in at 4pm for a set amount of time the following day—but the plant can be called on a moment’s notice to supply power at an unexpected time at a price named for them. In short, there are a lot of variables, known and unknown, that complicate the process.
* On whether or not one should use WTI pricing for hedging purposes. Eydeland says that liquidity is increasing “forever and ever,” and doesn’t see the use of WTI going anywhere.
* An audience member asked if the use of a given commodity VaR gives a false sense of security. Or, conversely, what leniency does it give? Again, Eydeland: no single number should be used as a metric in energy risk management. Use many numbers and metrics, plain and simple.
* To wrap it up, someone wanted to know who “the next kid on the block” is? Who’s the next Apple for the energy sector? Oster, with humor and verve, answered: “Is anyone the leader? No. Is there a lot of money being spent? Yes.” (Note: My eyes are on Google. They just created a utility to buy and sell energy, see more here).
And on that note the discussion ended. 250 people made great use of the open bar and munched on finger foods. The crowd didn’t go anywhere—lots of mingling and further discussion of the night’s topic took place over glasses of chardonnay. I meandered to the panelists’ table where a crowd had gathered and pinned all the speakers back with enthusiastic questions and comments. Swindle fielded questions on load volatility while Altman mused on transitions to green technology, and Eydeland signed a copy of his book for one smiling admirer. All and all, a great night.
Learn more about energy risk management
GARP’s previous energy forum was on December 8 in Houston, TX. On January 28, Glenn Labhart, chair of GARP’s Energy Oversight Committee, will host a webcast on the need for standardized energy risk education and certification. This webinar will be hosted by EPRI (register here). And on February 2, the Zurich chapter will host a meeting on investment opportunities in the global carbon markets. Keep an eye on the GARP website for more events and opportunities to learn about energy risk management.
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Chris Donohue, Managing Director at GARP, kicked off the evening with a presentation about GARP’s newest certification, the Energy Risk Professional (ERP) program (learn more about that here). A number of ERP Holders representing the first class of the certification were in attendance as well, and were recognized with a genial round of applause. Congratulations to them for their spirited effort at tackling a tough exam!
(By the way, Alexander Eydeland should be a familiar name to those who have taken the ERP or are pouring over the ERP Course Pack now: chapters from his co-authored book, Energy and Power Risk Management are in the study guide).
GARP hosted last night’s event, as part of an international series of forums on the future of energy risk management. The crowd, approaching 250, listened intently to the panelists’ views on a number of topics, ranging from the complexity of hedging energy to utilization of VaR to smart grid hang-ups, and more. Panelists mused on a few thoughts before turning to the crowd for questions.Here are some of the highlights:
* Altman led off by asking what makes trading and risk management of electricity and related fuels (gas, coal, etc) so much more challenging than financial risk management of bonds, stocks, currencies, etc? Or, at least what are the salient differences? (Note: this is a dandy of a question, one I hope to take on in future blog posts, stay tuned). Swindle took the lead, bluntly stating that electricity is more volatile. He says power and commodities are “special all the time,” meaning there are a lot of risks with few hedging strategies. In short, he’s “haunted” by the number of risk variables with such few mitigation techniques. How does one handle a commodity that has hundreds of forward curves?
Oster echoed Swindle’s sentiments, then added that electricity is not storable, which is problematic. Also, constraints on physical infrastructure and delivery methods make dealing with electricity unique. Eydeland too shook his head, thinking of the number of variables involved in managing a beast like electricity. Theories and models that work with traditional financial trading instruments just don’t work in energy, he says. On paper, everything looks fine, but engineering and environmental aspects (i.e., the physical world of energy) can change at a given moment, thus adding a measure of complexity to the fundamental issues at hand. On top of all this, the illiquid nature of energies is problematic for risk managers.
* Altman: what are your biggest headaches these days? Eydeland pointed to regulatory uncertainty. Regulations, he said, could change overnight. They are impossible to hedge and forecast. Credit problems are an issue right now too. Money’s not moving fast enough to the right places at the moment, causing headaches in the energy field. Oster’s headache revolves around valuation. How does one value a 30-year old power plant, for instance? Traditional VaR methods don’t work in this instance. Further, he applauded the efforts of the ERP program, because in the energy risk management world, there are no common metrics or models being applied across the board. In short, energy risk managers often aren’t “speaking the same language,” and this needs to be fixed.
At this point, the microphones in the audience came to life. Here are a few highlights:* One audience member was curious as to how the panelists were dealing with the smart grid factor. Oster noted that once smart grids are used effectively, the dynamics of power usage would certainly be altered. Swindle, however, is holding back on the smart grid factor for now because he is unsure of the rapidity with which the idea will develop. As of now, there are no analytics with which to conjecture. He agreed with Oster though: once up and running, smart grids could refine and smooth the operating market. Altman deftly handled the smart grid line of questioning, noting that in a flip of the status quo, power companies could turn to consumers to purchase energy to fulfill peak demand requirements. In so doing, the risk mitigation technique of turning to consumers could alter hedging strategies. Smart grids will also dramatically decrease peaks in pricing markets. (Clearly smart grids are Altman’s bag. Check him out in the November and December issues of Energy Risk too).
* On taking into consideration the financial health of suppliers in the energy chain, Eydeland says one must worry about this factor “a lot.” And it’s not just credit worthiness—cash flow management has become a concern for risk managers. How funds are allocated within a company (smartly, to the right projects, etc), is something to keep an eye on.
* How does one hedge in electricity knowing that weather is volatile? Put it in the contract! So says Eydeland anyway. But Eydeland and Oster spun the audience member’s question, lamenting on the inability to hedge against economic growth—or lack thereof. Oster, for one, noted that load growth predictions did not live up to their expectations, which can be traced to the economic downturn. This is a real risk management concern.
* How does one choose the kind of power generation to purchase? Choices like picking gas generation over renewable generation are not always easy to make. Well, Oster says, generation and purchase of it varies from state to state. So that’s one problem to deal with. Secondly, the bidding process for power is extremely dynamic. Bids, for example, can go in at 4pm for a set amount of time the following day—but the plant can be called on a moment’s notice to supply power at an unexpected time at a price named for them. In short, there are a lot of variables, known and unknown, that complicate the process.* On whether or not one should use WTI pricing for hedging purposes. Eydeland says that liquidity is increasing “forever and ever,” and doesn’t see the use of WTI going anywhere.
* An audience member asked if the use of a given commodity VaR gives a false sense of security. Or, conversely, what leniency does it give? Again, Eydeland: no single number should be used as a metric in energy risk management. Use many numbers and metrics, plain and simple.
* To wrap it up, someone wanted to know who “the next kid on the block” is? Who’s the next Apple for the energy sector? Oster, with humor and verve, answered: “Is anyone the leader? No. Is there a lot of money being spent? Yes.” (Note: My eyes are on Google. They just created a utility to buy and sell energy, see more here).
And on that note the discussion ended. 250 people made great use of the open bar and munched on finger foods. The crowd didn’t go anywhere—lots of mingling and further discussion of the night’s topic took place over glasses of chardonnay. I meandered to the panelists’ table where a crowd had gathered and pinned all the speakers back with enthusiastic questions and comments. Swindle fielded questions on load volatility while Altman mused on transitions to green technology, and Eydeland signed a copy of his book for one smiling admirer. All and all, a great night.
Learn more about energy risk management
GARP’s previous energy forum was on December 8 in Houston, TX. On January 28, Glenn Labhart, chair of GARP’s Energy Oversight Committee, will host a webcast on the need for standardized energy risk education and certification. This webinar will be hosted by EPRI (register here). And on February 2, the Zurich chapter will host a meeting on investment opportunities in the global carbon markets. Keep an eye on the GARP website for more events and opportunities to learn about energy risk management.
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